Paper bank checks are in widespread use. FIG. 1 illustrates a typical bank check 3. After the payee 6 receives the check 3, the payee 6 will take steps by which the check 3 enters a check-clearing system, which in the United States is operated by the Federal Reserve System.
A special case would occur if the check 3 is presented to the bank 9 on which the check is drawn. In that case, the drawee-bank 9 would simply (1) deduct the amount 12 of the check 3 from the account of the drawer 18, the account number being contained in the MICR line 15, (2) pay the payee 6, (3) retain the check 3 rather than entering it into the clearing system, and (4) perhaps later deliver the check 3 to the drawer 18 in a monthly statement.
But, in the general case, the check 3 will enter the check-clearing system. The check-clearing system performs several functions. One is that it sorts all the checks according to drawee-bank, and delivers the checks to the respective drawee-banks.
A second is that it handles money transfers, so that all banks involved are properly charged and credited. For example, if the payee 6 of the check 3 in FIG. 1 deposits the check 3 in the payee's own bank, that bank will give a provisional credit to the payee's account. That bank is called the bank-of-first-deposit, BOFD.
The BOFD then enters the check 3 into the check-clearing system, wherein (1) the physical check is transferred to the drawee-bank 9, (2) a charge is levied against the drawee-bank 9 in the amount 12 of the check, and (3) a credit is issued to the BOFD in that amount.
The check-clearing system performs additional functions, which will not be described in detail, but briefly mentioned. It handles issues arising when the drawee bank 9 rejects the check 3, as can occur if the account 15 lacks funds to pay the check 3, or if the account 15 has been closed.
It also assures the credit-worthiness of the banks involved, thereby minimizing the possibility that a bank will become insolvent during the check-clearing process, and thereby default on a charge which has been levied against it.
It also sets up procedural rules, such as specifying the time limit within which a drawee-bank must reject a check drawn on an account lacking funds. If the limit expires, the drawee-bank is deemed to have accepted the check.
Therefore, the check-clearing system can be viewed as performing three primary types of function. One is that it sorts and distributes the paper checks to the drawee-banks. A second is that it transfers money among the banks to settle accounts. The third type of function can be viewed as a collection of administrative procedures which enable the clearing system to accomplish the first and second functions in a practical manner. The particular methods in which the functions outlined above are presently implemented have evolved for historical reasons, primarily because the checks used always have been paper-based. With the development of modern electronics and high-speed digital computers, it may be possible to eliminate some of the steps required in a paper-based check clearing system, to thereby streamline the check-clearing process.